By Beth Manzi, Chief Operating Officer, PEF Services LLC
In an era of increased regulatory scrutiny, sophisticated investors, and narrowing margins, General Partners are turning to their fund administrators for solutions. But while some are rising to the challenge, others are falling short.
Why General Partners Are Rethinking Their Needs
From mega-buyouts to Dodd Frank to ILPA guidelines to the credit crunch, the private capital market has undergone extraordinary change over the past decade. As part of the strategy to proactively manage that change, many General Partners chose to outsource the administration of their funds to professionals. By placing this function in the hands of a fund administrator, they expected to improve compliance, strengthen investor trust, and streamline back-office operations.
While in many cases the relationship has fulfilled the expectation, in others the reality has failed to live up to the expectation.
What motivates General Partners to seek out a new fund administrator? It comes down to four key factors: service quality, portfolio complexity, regulatory requirements, and cost.
Dissatisfaction with service quality was the top reason for switching to a different fund administrator, with 27% of Preqin survey respondents citing this as the main reason behind the switch.1 Increased regulatory requirements have driven up the cost of operations, and General Partners are looking to their service partners to find innovative ways to achieve greater efficiency and deliver more value. When those partners can’t deliver, it’s triggering a search for a new provider that can.
If your firm is dissatisfied with service levels and plans to find a more service oriented fund administrator, make sure you ask the right questions the second time around.
Fund complexity was found to be another key reason for General Partners to switch fund administrators: according to Preqin, 23% of General Partners cited this as a factor.2 Many fund administrators are capable of handling relatively simple fund strategies, but as a fund manager expands into other, more complex fund strategies, such as private debt/ credit or real estate, not every fund administrator has the resources and expertise to develop and maintain the structures required to service these complex fund types.
23% of General Partners cited fund complexity
as a reason to switch fund administrators.
If your firm has or is planning to diversify into more complex fund strategies and you need to find a service partner capable of supporting your efforts, look for a fund administrator with specific expertise and active clients in the relevant areas. Ask for references from at least two active clients with fund strategies similar to yours.
Regulatory pressures loom large for everyone involved in the private capital markets. In a 2017 survey of the global asset management community, nearly a quarter (24.2%) of respondents believed that political and policy (regulatory) changes are the primary disruptive forces in asset management over the next three years, and 50% of respondents identified keeping up with the myriad of changes to global regulation as their top current concern.3
If your firm has difficulty meeting regulatory requirements, or if you are not convinced that your fund administrator is doing an adequate job of ensuring compliance, look for the practices and capabilities that signal expertise in this area.
If your firm is concerned about paying too much for the services received, look at your existing fee structure. Does your current service provider base their pricing on the total AUM to be administered? This fee structure can result in costs that exceed the value of the services rendered, particularly when the AUM are primarily in an easy-to-administer fund strategy.
Overall, it’s important that your fund administrator be an effective partner with your internal team. Your day-to-day contacts should have experience working with firms similar to yours in structure, strategy, and reporting requirements.
Look for fund administrators that offer formal service-level agreements (SLAs) and are willing to customize your SLA to meet any specific requirements that you or your investors may have. It’s a best practice to have your fund administrator schedule status calls weekly, or every two weeks at minimum, so look for an SLA that covers regular meetings.
If personalized service is a priority, consider a boutique service provider that is able to provide a deeper level of customization, more direct access to senior-level expertise, and a dedicated, single-point-of-access account manager supported by a wider team.
Why are so many of these relationships breaking down, causing fund managers seek out new arrangements? Read the white paper entitled ‘Making The Switch’ which focuses on some of the key areas of dissatisfaction and examines the ways in which General Partners can make a more informed, successful choice the second time around. The paper includes a helpful checklist for General Partners and their fund administrators to smooth the transition.